This is Tim: Apple CEO talks at investment conference

On Tuesday, Apple CEO Tim Cook spoke at the Goldman Sachs Technology and Internet Conference, where he was interviewed on stage by Bill Shope, Goldman Sachs’s IT hardware analyst. Here’s an edited transcript of what Cook had to say on a variety of topics, ranging from working conditions at Apple’s Chinese suppliers to Apple’s culture and ethos.

On working conditions in China

The first thing that I would want everyone to know is that Apple takes working conditions very, very seriously, and we have for a very long time. Whether workers are in Europe or in Asia or in the United States, we care about every worker. I spent a lot of time in factories, personally, and not just as an executive. I worked in a paper mill in Alabama and an aluminum plant in Virginia. Many of our top managers and executives visit factories on a regular basis and we have hundreds of employees that are based there full-time. So we are very closely connected to the production process and we understand worker conditions at a very granular level.

Now, I realize that the supply chain is complex and I’m sure that you realize this. And the issues surrounding it can be complex, but our commitment is very, very simple: We believe that every worker has the right to a fair and safe work environment, free of discrimination, where they can earn competitive wages and they can voice their concerns freely. And Apple suppliers must live up to this to do business with Apple.

We also believe that education is the great equalizer, and that if people are provided the skills and knowledge, that they can improve their lives. We put a lot of effort into providing educational resources for workers throughout our supply chain. We provide free classes in many of the locations in our supply chain, and we partner with local colleges to provide courses like English, and entrepreneurship, and computer skills, and the like.

More than 60,000 employees have attended these classes, which is pretty amazing when you think about it. If you could take all of these employees and move them to one location, it would be a campus population larger than Arizona State, which is the largest public university in the United States.

Many of these workers go on to earn associate’s degrees. So this is a very powerful stepping stone for people looking to advance their careers and their lives. In terms of problems that we are working to fix, you can read the details on our website. But I would tell you that no one in our industry is doing more to improve working conditions than Apple.

We are constantly auditing facilities, going deep into the supply chain, looking for problems, finding problems, and fixing problems. And we report everything because we believe that transparency is so very important in this area. I am so incredibly proud of the work our teams are doing in this area. They focus on the most difficult problems, and they stay with them until they fix them. They are truly a model for the industry.

Let me give you some examples, because I think this is so important and this is so topical. It goes from large to small.

We think the use of underage labor is abhorrent. It’s extremely rare in our supply chain, but our top priority is to eliminate it totally. We’ve done that with our final assembly vendors and are now working down into the supply chain. If we find a supplier that intentionally hires underage labor, it’s a firing offense.

We don’t let anyone cut corners on safety. If there’s a production process that can be made safer, we seek out the foremost authorities in the world, the foremost experts, then cut in a new standard and then take that and apply it to the entire supply chain.

We focus on the details. If there’s a fire extinguisher missing from the cafeteria kitchen, then that facility doesn’t pass inspection until that fire extinguisher is in place.

We’re continuing to focus on the problems that our endemic to our industry, like excessive overtime. Our code of conduct has a cap of 60 hours for a work week, but we’ve consistently found violations to this code over the course of our time. So at the beginning of this year, we announced that we’re determined to drive widespread change.

And we’ve begun to manage working hours at a very micro basis. As an example, in January, we collected weekly data on over half a million workers in our supply chain. And we had 84 percent compliance. Now this is significantly improved from the past, but we can do better. And we’re taking the unprecedented step of reporting this monthly on our website, so that it’s transparent to everyone what we’re doing.

Now as you probably know, the Fair Labor Association began a major audit of our final assembly vendors, at our request. We started working with the FLA last year on an auditing project and just in January, we were the first technology company ever admitted into their association.

The audit that they’re conducting is probably the most detailed factory audit in the history of mass manufacturing. In scale, in scope, and in transparency. And I’m looking forward to seeing it resolved.

We know that people have a very high expectation of Apple. We have an even higher expectation of ourselves. Our customers expect us to lead and we wil continue to do so. We are blessed to have the smartest and most innovative people on Earth, and we put the same kind of effort and energy into supply responsibility as we do with our new products. That is what Apple is all about.

On growth opportunities for the iPhone

Yes, 37 million [iPhones sold in the last quarter] is a big number. It was a decent quarter. [laughter] It was 17 million more than we’d ever done before. And so we were pretty happy with that. But let me give you a different—at least the way I look at the numbers, which is maybe a little differently than you do.

As I see it, that 37 million for last quarter represented 24 percent of the smartphone market. So there’s 3 out 4 people that bought something else. And it represented less than 9 percent of the handset market, so 9 out of 10 people are buying something else. The smartphone market last year was a half a [billion] units; in 2015, it’s projected to be a billion units. The handset market is projected to go from 1.5 [billion] to 2 billion units. And so when you take it in the context of these numbers, the truth is that this is a jaw-dropping industry. It has enormous opportunity to it, and so up against those, the numbers don’t seem so large anymore.

What seems large to me is the opportunity. So what we’re focusing on is the same thing we’ve always focused on, which is making the world’s best products. And we think if we stay laser-focused on that, and continue to develop to the ecosystem around the iPhone then we have a pretty good opportunity to take advantage of this enormous market.

On making iPhones more affordable, and appealing to developing markets

These markets are—first of all, they’re critical. To go back to something I said before, the smartphone market is projected to be a billion units in 2015, so just three years from now, and 25 percent of that is projected to come from China and Brazil. And so just two of the markets, 25 percent. And obviously, those are two very critical markets, but there are others as well.

We’ve been very, very focused on China. China, we’ve had incredible success with iPhone. Over the past few years, we’ve gone from a few hundred million dollars of revenue in greater China, to last year $13 billion. So we really’ve been focused on trying to understand the market there and then taking those learnings to other markets. As it turns out—and not very many people agree with me on this, probably—but what I see is that there’s a lot of commonality in what people around the world want.

Everyone in every country wants the best product, as it turns out. They’re not looking for a cheap version of the best product, they’re looking for the best product. And so that’s the common thread that runs through.

Now, in the emerging markets, there are very big differences in the go-to market. For example, in most of the developed markets, the carrier owns most of the distribution themselves, but in the emerging markets, the retailer has a significant portion of the distribution. And so, the whole go-to market has to be changed significantly as you go in there.

Last year, as you know, we covered price points in the subsidized markets from zero on up. And of course, that doesn’t translate to 0 to prepaid markets. But it does translate to lower in the prepaid market, and so we’re covering more price points there.

But I would come back to the paramount thing is the product. It is the focus. And of course, distribution, we’ve recognized the differences there. We’ve recognized the difference in purchasing power. And, by the way, unlike probably many people, I don’t subscribe to the premise that a prepaid market is a prepaid market is a prepaid market.

Because in China, one of the things we did was we convinced China Unicom to try the postpaid business as well, and it really hadn’t been tried very much in China before, but it was amazing what kind of conversion that they go to the postpaid business with iPhone. And this is great for the customer, because they get the phone at a lower price; it’s great for the carrier, because they lock in a customer for a longer period of time, and so everyone wins from this. I’m not saying that will work in every market; it won’t. But it’s a different way of looking at the issue, and it’s certainly been successful in China.

On the iPad and the Mac in emerging markets

As it turns out, when Apple introduced the iPod in 2001, and then, after porting it to Windows and getting the iTunes Music Store up and porting the iTunes Music Store to Windows, the iPod created a halo for the Mac. And that kicked off a resurgence in the Mac that has now—for 23 straight quarters we’ve outgrown the market on the Mac; that’s six years.

However, the halo that was created by iPod for the Mac, was created in developed markets. It was created in the United States, it was created in Western Europe, it was created in Japan, it was created in Australia and Canada. It didn’t work nearly to the same level in Eastern Europe, Middle East, Africa, China, other parts of Asia, Latin America. Because people were already getting music from their phones.

However, the world changed for us, in many ways, when the iPhone was launched. Because the iPhone began to introduce Apple to literally hundreds of millions of people—some that bought it, some that didn’t; others that desired it. But it introduced our brand to people who had never met Apple before.

Take China, as an example, because I’ve talked about that. Last year the Macintosh in China grew over 100 perent year over year. Not on a big base, but 100 percent is pretty good. The market grew 10 percent, so it outgrew the market 10 [times]. What is clearly happening now is that the iPhone is creating a halo for the Macintosh. The iPhone has also created a halo for iPad. So you can definitely see the synergistic effect of these products, now not only in the developed markets, but in those emerging markets where Apple wasn’t really resident to any degree for most of its life.

Just to give you some numbers to put it in context: If I look back at 2007—I’m picking that because we didn’t launch the iPhone outside the United States until 2008. In 2007, the revenue combined from greater China, several other parts of Asia, India, Latin America, Eastern Europe, Middle East, Africa was $1.4 billion. The revenue last year for that same group of countries was $22 billion. And we’re only on the surface. That’s how I feel, because we’ve focused mainly in China and last year we began to focus increasingly more on Brazil, and on some level in Russia. But there’s lots more opportunity out there, and so I think this is very, very profound and very big for us.

On the demand for iPad

This 55 [million] is something no one would have guessed. Including us. To put it in context, it took us 22 years to sell 55 million Macs. It took us about 5 years to sell 22 million iPods, and it took us about 3 years to sell that many iPhones. And so, this thing is, as you said, it’s on a trajectory that’s off the charts.

And so, why is this? Well, the product is absolutely incredible. And the pace of innovation on the product has been incredible. And so, we’ve gone from iPad 1 to iPad 2 in fairly short order. And the ecosystem that developers have helped us build out—there’s a 170,00 apps that are optimized for iPad—and so this is incredible. But the reason that it’s so large, in my view is, one: The iPad has stood on the shoulders of everything that came before it. The iTunes Store was already in play. The App Store was already in play. People were trained on iPhone, and so they already knew about multitouch. And so there was lots of things that became so intuitive when someone began to use a tablet, that—I mean, I gave one to my mother and she knew how to use it like this [snaps] from just watching the commercial.

It’s amazing how the product has captured so many people—you’re using one, my mother’s using one, my seven-year-old nephew uses one. I to go the gym in the morning, the trainer’s using one. At Starbucks, I look around—everybody has one, reading their newspaper or whatever. In education, it’s being used; in the enterprise, it’s being used in big numbers. From my point of view, it’s the fastest adoption across a wide range that I’ve ever seen before.

On competition in, and the future of the tablet market

You know, we started obviously in Apple using the iPad well before it was launched. Of course, we had our shades pulled and everything so nobody could see us. What I started noticing about my own personal behavior, it quickly became 80 to 90 percent of my consumption and work was done on the iPad.

Honestly, from the first day it shipped, we thought—not just me, many of us thought at Apple—that the tablet market would become larger than the PC market, and it was just a matter of the time that it took for that to occur. And I feel that stronger today than I did then. Because as I look out and I see all of these incredibly usages for it, and I see the incredible race and pace of innovation, and the developers.

If we had a meeting today in this hotel and we invited everybody that’s working on the coolest PC apps to come to the meeting—you might not find anybody in the meeting! But if you did that same thing for iOS or that other operating system, and said everybody that’s working on this come, you couldn’t get everybody in those hotel. You’d have somebody covering every square inch here. That’s where the innovation here. That doesn’t mean the PC is going to die; I love the Mac! And the Mac is still growing, and I think it can still grow.

But I strongly believe the tablet market will surpass the unit sales of the PC market, and it’s just a matter of the rate and speed and time that that happens. It’s too much of a profound change in things not to, I think. Anyway, that’s my opinion—people can always disagree. I feel strongly about it, if you can’t tell.

On product pricing

Price is rarely the most important thing. A cheap product might sell some units and somebody may get it home and you know, they feel great when they pay from their wallets, but then they get it home and use it, and the joy is gone. And the joy is gone every day that they use it and that’s why they’re not using it anymore! [laughter] You don’t keep remembering “Oh, I got a good deal,” because you hate it! [laughter]

So what happened last year, everybody that was in the PC industry and everybody that was in the phone industry, everybody decided they had to do a tablet. By some estimates, there were a hundred tablets put on the market last year. Everybody was kind of aiming at iPad 1, and we were trying to innovate quickly to get to iPad 2. So, by the time they had something that they thought could compete with iPad 1, we were on iPad 2. We wound up with 170,000 apps, and I’m not sure there’s 100 yet on the other platform.

I think people at the end of the day, they want the great product. Amazon is a different kind of competitor. They have different strengths, and so forth. And I think they’ll sell a lot of units—I think they have and they will. But the customers that we’re designing our products for, are not going to be satisfied with a limited function kind of product. I think the real catalyst to the tablet market will be innovation and pushing the next frontier. Honestly, we’ll compete with everybody. I love competition. As long as people invent their own stuff, I love competition. [laughter]

On the cannibalization of Mac sales by the iPad

I think that iPad has cannibalized some Mac sales. And the way that we always view cannibalization is, we prefer we do it than have somebody else do it. And so we never want to hold back one of our teams from building the absolute greatest thing, even if it takes some sales from another product area. Our high-order bid is, we want to please customers, we’d like them buying Apple stuff.

Now, I don’t predict the demise of the PC industry; I don’t subscribe to that. I do believe, given what we’ve seen, iPad is cannibalizing some Mac, it’s cannibalizing more Windows PCs. There’s many more of them to cannibalize than Macs, and that’s a plus for us. I think tablets in general will cannibalize PCs.

But I think what it will do largely, as time goes on, is, you know, when you’re competing with someone—maybe politicians do this, I don’t know anything about politics—but I think it forces you to sharpen your message and tell who you are. And so, I think it’ll be good for the PC industry, because they’ve got this strong competitor; and I think it’ll be good for tablets, because they’ll innovate like crazy over here; and customers will decide what to buy at the end of the day. And I do think that, out of that, there will still be a strong PC industry. I just think the tablet industry is going to be larger in units than the PC industry.

On Apple’s cash holdings, spending, and returning money to shareholders

Well, let me first talk about your use of the word “sparingly” because this one I don’t agree with. Or at least, I wouldn’t use the word in the same context. We’ve actually spent billions in the supply chain. We’ve spent billions on acquisitions and including the acquisition of [intellectual property]. We’ve spent billions on retail. We’ve spent billions on the infrastructure, the company, data centers and so forth for the App Store and iCloud, etc., but yes we still have a lot. I guess I’m just pointing that out to say—I would say that we’re judicious; we’re deliberate. We spend our money like it’s our last penny. I think shareholders want us to do that. They don’t want us to act like we’re rich, and we’ve never felt that way honestly. That may sound bizarre, but it’s the truth.

Now, in terms of our approach on cash, I’ve said since becoming CEO, I’m not religious about this. I’m not religious about holding it or not holding it. And we’re in very active discussions at the board level on what we should do. But I think everyone would want us to be deliberate and really think through, and that’s what we’re doing. We’re not going to go have a toga party or do something outlandish, and so people don’t have to worry it’s going to burn a hole in our pocket.

[Our cash position] was always discussed. It’s not new that we’re discussing it. It is being discussed more, now, and in greater detail, and that’s because the balance has risen to the point that you’ve already made. And I think it’s clear to everyone, and I’d be the first to admit, we have more cash than we need to run the business on a daily basis. I’m sure everyone would agree with that in here. And so we’re actively discussing it. I only ask for a bit of patience, so that we can do this in a very deliberate way and make the best decision for the shareholders.

On Apple TV, and the future of the living room market

Well, I wouldn’t want to go into detail about future stuff, obviously, or make any comment that people would misconstrue along those lines. In terms of our existing products, we sold just shy of 3 million Apple TVs last year. If you don’t have one, you should go out and get one; it’s a very cool product, and I couldn’t live without it—just as a short promotional break.

We sold 1.4 million last quarter. It’s clearly ramping. But the reality, the reason we call it a hobby, is that we don’t want to send a message to you or our shareholders that we think that the market for it is the size of our other businesses, the size of the phone business, the size of the Mac business, the size of the iPad business, or the iPod business. We don’t want to send the signal that we think the leg of that stool is of equal length as those others. And so that’s the reason we messaged it as a hobby.

Apple doesn’t do hobbies, as a general rule. We believe in focus and only working on a few things. With Apple TV, however, despite the barriers in that market, for those of us who use it, we’ve always thought there was something there. And that if we kept following our intuition and kept pulling the string, then we might find something that was larger. For those people that have it right now, the customer sat[isfaciton] is off the charts. But we need something that could go more main market for it to be a serious category. But if you don’t have one, you should get one, because it’s a really cool product.

On Siri and iCloud

I think Siri and iCloud are profound. If you take iCloud; if you dial back 10 years, 12 years, Steve [Jobs] announced a strategy for Apple that positioned the Mac or PC as the hub of someone’s digital life. And out of that. Apple developed a whole suite of apps called iLife, and you could connect many gadgets off of this and sync all of your music or photos, you could edit your photos, you could edit movies, and so forth. But the idea was that the PC or Mac was the repository.

iCloud turns that on its head. It recognizes that across that decade, particularly the last two or three years, you and I live off of multiple devices. It’s no longer a great customer experience to have to sync your iPad to your Mac, and then your iPhone to your Mac, and then resync your iPad because there was something on your iPhone—this is a hair-pulling exercise. iCloud recognizes the Mac or PC as another device, and all of the sudden your life has just gotten so much easier. We now have 100 million users of iCloud. We just launched it in October. 100 million. This is unbelievable. And there’s obviously more we can do with it.

I would view iCloud not as something with a year or two product life; it’s a strategy for the next decade or more. I think it’s truly profound.

On Siri. You know, for years, if you were a PC or Mac user, you used a physical keyboard, and you used a mouse for input. And you pretty much did that for a long, long time. And there wasn’t a great deal of—there was evolution in that space, but not a lot of revolution, really.

And then all of a sudden Apple comes out with multitouch on the [MacBook Pros], and this was really cool, and then extended that into phones and tablets. So this has completely has changed those industries in total. But Siri is another profound change in input, and it’s something that we’ve always dreamed of. I think all of us wanted this to work. It’s sort of like having a video call with FaceTime—it was “aha, it can work!” Siri, it’s hard to imagine it’s jut a beta product. I’ve never felt I couldn’t live without a beta product before, but now I feel like I can’t live without one.

I think these two are both profound; they’re not things where we run separate [profits and losses] on, because we don’t do that—we don’t believe in that. We manage the company at the top and just have one [profit and loss] and don’t worry about the iCloud team making money and the Siri team making money. We want to have a great customer experience, and we think measuring all these things at that level would never achieve such a thing. But I do think that both of these go in the profound category; they’re not these things that will not mean anything a year or two from now. They’re things that you will look back at, that you’ll talk to your grandkids about, that were profound changes.

On Apple’s culture and strategy

Apple is this unique company, unique culture that you can’t replicate. And I’m not going to witness or permit the slow undoing of it, because I believe in it so deeply.

Steve grilled in all of us, over many years, that the company should revolve around great products, and that we should stay extremely focused on few things. Rather than try to do so many that we did nothing well. And that we should only go into market where we can make a significant contribution to society, not just sell a lot of products in a market.

So, these things, along with keeping excellence as an expectation of everything at Apple, these are the things that I focus on, because I think those are the things that make Apple this magical place that really smart people want to work in and sort of do not just their life’s work, but their life’s best work.

There’s no better thrill than to look out at an audience and see people using iPhones, or go to the gym and see people using iPods, or go to Starbucks and seeing people use the iPad. These are the things that bring a smile to my face, and there is no replacement, or no substitute, for that.

And so we’re always focused on the future. We don’t sit and think about how great things were yesterday. And I love that trait, because I think it’s the things that drive us all forward. So those are the things I’m holding onto, and it’s a privilege to be a part of it.